ok...I think i solved the issue. You have to scaled it first than move the wallpaper. You can not just move it.
This is what I did.
First I turn the phone upside down. Tried moving the wallpaper that way and nothing happned.
Next I turn it right side up again and zoomed in and out.
Then I was able to move the wallpaper.
You don't have to turn the phone upside down to move it. You just need to zoom in than out (go in really close. than see it full view), than move the wallpaper.
If you let the phone go on standby (black screen) while you move the wallpaper you will have to repeat the steps (zoom in and out, than move) again.
You really shouldn't have to jump through those hoops to do a simple resize, move and scale for a wallpaper. I hope Apple is monitoring these boards because a lot of people are having this problem. It allows me to "pinch" the image and move it as long as the image is pinched...but when I try to "set" the image in a new smaller position, it snaps back to its original size. LAME.